INTRODUCTION

The direct tax which is paid by individual to the Central Government of India is known as Income Tax. It is imposed on our income and plays a vital role in the economic growth & stability of our country. For years the Government is generating revenue through this tax system.

The word 'Tax' originated from the 'Taxation.' which mean 'Estimate.' Hence, 'Income Tax' mean 'Income Estimate,' which helps the government to know the actual economic strength of a person. It is also a way to set up an economic standard for general people. It helps the Government to know the distribution of money among country's people.

Income Tax has been in force in different forms since years. If we go through the history of India, we get relevant information regarding the taxation system of India. In ancient history, it is mentioned about such system which were imposed on the income, expenditure and other subject. Even information of the same is given in Manu Smriti and Arthasatra which confirms its existence at that time.

In modern India, Income Tax came into existence in 1860 with the implementation of first Income Tax Act. After implementation of this Act, people became aware of the actual meaning of Income Tax. This act was in force for first five years. After this, in 1865, second Act came into force. There were major changes in this Act relative to the first. It proved itself as a good factor for the growth of our economy. With this Act a new concept of Agriculture Income came into existence.

After this, different new Act was also implemented. The most important of them is

the Income Tax Act, 1961. According to ruling of Income Tax Act, 1961, any person whose salary from any source of income is more than the maximum limit of unchargeable amount will be liable to pay Income Tax. There is also a provision of deduction and exemptions in Income Tax, depending upon the type of assessee, source of income, residential status and investment in saving schemes. Income tax rates are a matter of change, which is declared by Ministry of Finance, Government of India regularly, usually on annual basis.

INCOME TAX REFUND

Indian Tax payers can now heave a sigh of relief as tracking down their refund status has become easy. The tax authorities have simplified the process of tracking your refund cheque status. If you are a taxpayer looking for some information on your tax refund status you can simply track the exact status of your refund online. Visit the NSDL-TIN website www.tin-nsdl.com and click on 'Status of Tax Refunds'. In order to track your refund status you will have to enter PAN and Assessment Year information for which refund is to be tracked.

INCOME FROM FIVE HEADS

Income From Five Heads are as Follows 1. Income from salary 2. Income from house property 3. Income from profit or gain from business or profession. 4. Income from capital gain 5. Income from other sources.

INCOME FROM OTHER SOURCES

Income from other sources, as its name suggests, includes all other forms of income which includes dividends, income from winnings, lotteries, horse race, crossword puzzles, card games and other form of incomes from securities. Income under this category needs to be deducted at source and also be included in the total income section of the assessee. Thus, we find all five major heading which are included in considering the total income of an assessee.

Income from other sources This is a residual head, under this head income which does not meet criteria to go to other heads is taxed. There are also some specific incomes which are to be always taxed under this head. 1. Income by way of Dividends. 2. Income from horse races/lotteries. 3. Employees' contribution towards staff welfare scheme. 4. Interest on securities (debentures, Government securities and bonds). 5. Any amount received from keyman insurance policy as donation. 6. Gifts (subject to certain conditions and exemptions). Interest on compensation/enhanced compensation

1. income taxable under the head "Income from other sources"? Where there is an income and it cannot be charged under any other heads of Income i.e neither salary income, nor rental income from house property nor

income from business/profession, nor capital gains, then such income is taxable under the head "Income from other sources". Income from other sources is charged under section 56 and is called Residual Head of Income. 2. incomes charged to tax under the head "Income from other sources" only? Under section 56(2), the following incomes are always chargeable under the head "Income from other sources":

Dividends: Any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.

Any sum, received from employees as contribution to a fund for the welfare of employees if such income is not chargeable to tax under the head "profits and gains of business of profession".

Income from machinery, plant or furniture let on hire (if it is not chargeable under the head "profits and gains of business or profession ")

Income from letting out of plant, machinery or furniture, along with building and letting of building is inseperable from the letting of plant, machinery or building (if it is not chargeable to tax under the head "profits and gains of business or profession")

Any sum, received under a key man insurance policy bonus (if not taxable under section 15 or 28.

Where any sum of money, exceeding Rs. 25, 0000, is received without consideration by an individual or a Hindu Undivided Family from any person after Aug 31, 2004, the whole of such sum is chargeable to tax (applicable from the asset yr 2005-06).

3. examples of income taxable under the head "Income from other sources". 1) Insurance commission 2) Rent of plot of land 3) Interest on bank deposits and loans 4) Income from sub-letting 5) Casual income 6) Agricultural income received from outside India

5.bonus shares not deemed to be dividend When the company issues bonus shares, there is no release of assets by the company to its shareholders as per section 2(22). Hence, bonus shares are not taken to be dividend. However, if bonus shares are issued to preference shareholders, then it will be distribution of dividend as per the sub clause b of section 2(22). 12. interest income exempt from tax Income Interest is exempt from tax u/s 10(15) from the following to the extent to that the amount of these certificates and deposits does not exceed the maximum amount permitted to be invested. Some forms of interest income are cited below: 1. Premium on redemption or other payments on notified bonds and securities or certificates, issued by the government and interest on notified deposits. 2. The notified securities /bonds etc. are Post Office National Saving Certificates, Special Bearer Bonds 1991, National Defence Gold Bonds 1980, Post Office CTD, National Plan Saving Certificate etc. 3. Interest on notified capital investments bonds in case of individual and HUF 4. Interest on notified relief bonds in the case of an individual and HUF

5. Interest, payable by the IFCI, IDBI, ICICI, Export Import Bank of India, National Housing Export Bank of or the Small Industries Development Bank of India on any money, borrowed before June 2001 from sources outside India. 6. Interest, payable by any financial institution established in India or a banking company, on any money borrowed from sources outside India, under a loan agreement approved by the central government before 1 June 2001 7. Interest on gold deposit bonds, issued under the Gold Deposit Scheme 1999 8. Interest on notified bonds issued by a local authority

13. Interest on securities is exempt from tax under sections 10, 11 and 13A if securities are held by the following:

Local Authority Approved scientific research association Any regimental Fund or Non Public Fund An institution, existing solely for the development of khadi and village industries

Authority established for the development of khadi and village industries. Any body or authority, constituted for the administration of public religious trust or endowments

The Prime Minister's National Relief Fund, the Prime Minister's Fund, the Prime Minister's Aid to Students Fund or any other notified institution.

Registered trade union Statutory Provident fund, recognized provident fund, approved super annuation fund and approved gratuity fund

Member of a schedule tribe. Corporation or other body or institution, established for promoting the interest of the members of schedule caste /schedule tribe.

Public charitable and religious trust or institution. Political party, registered with the election commission of India.

Deductions available

under the head "Income from Other Sources

Yes, the following deductions are available under Section 57: 1. Any reasonable sum, paid by way of commission or remuneration to a banker or any other person for the purpose of realizing dividend; 2. Any sum, received by a taxpayer as contribution from his employees towards any welfare fund of such employees, is allowable only if such sum is credited by the taxpayer to the employee's account in the relevant fund, before the due date; 3. Repairs, depreciation in the case of letting out of plant, machinery, furniture, building; 4. In case of income in the nature of family pension, the amount deductible is Rs 15,000 or 33.5% of such income, whichever is less.

INCOME FROM HOUSE PROPERTY This lesson deals with income, which falls under the head Income from house property. The scope of income charged under this head is defined by section 22 of the Income Tax Act and the computation of income falling under this head is governed by sections 23 to 27. Section 22 - 27 of Income Tax Act, 1961 there is a provision of income under head of house property. In every section from 22-27 there are detail specification of house property income. It is defined as income earned by a person through his house or land.

BASIS OF CHARGE (SECTION 22) The annual value of a property, consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head Income from house property. However, if a house property, or any portion thereof, is occupied by the assessee, for the purpose of any business or profession, carried on by him, the profits of which are chargeable to income-tax, the value of such property is not chargeable to tax under this head. Thus, three conditions are to be satisfied for property income to be taxable under this head. 1. The property should consist of buildings or lands appurtenant thereto. 2. The assessee should be the owner of the property. 3. The property should not be used by the owner for the purpose of any

business or profession carried on by him, the profits of which are chargeable to income-tax.

PROPERTY INCOMES EXEMPT FROM TAX

Some incomes from house property are exempt from tax. They are neither taxable nor included in the total income of the assessee for the rate purposes. These are: 1. Income from a farm house [section 2(1A) (c) and section 10(1)]. 2. Annual value of one palace in the occupation of an ex-ruler [section 10(19A)]. 3. Property income of a local authority [section 10(20)]. 4. Property income of an approved scientific research association [section 10(21)]. 5. Property income of an educational institution and hospital [section 10(23C)]. 6. Property income of a registered trade union [section 10(24)]. 7. Income from property held for charitable purposes [section 11]. 8. Property income of a political party [section 13A]. 9. Income from property used for own business or profession [section 22]. 10. Annual value of one self occupied property [section 23(2)].

COMPUTATION OF INCOME FROM LET OUT HOUSE PROPERTY

Income from house property is determined as under: Gross Annual Value xxxxxxx

Less: Municipal Taxes

xxxxxxx

Net Annual Value

xxxxxxx

Less: Deductions under Section 24

- Statutory Deduction (30% of NAV) xxxxxxx

- Interest on Borrowed Capital

xxxxxxx

Income From House Property

xxxxxxx

Deduction of Municipal Taxes From the annual value as determined above municipal taxes are to be deducted if the following conditions are fulfilled: The property is let out during the whole or any part of the previous year The Municipal taxes must be borne by the landlord (If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed). The Municipal taxes must be paid during the year (Where the municipal taxes become due but have not been actually paid, it 79 will not be allowed. Similarly, the year to which the taxes relate to, is also immaterial).

DEDUCTIONS UNDER SECTION 24 Two deductions will be allowed from the net annual value (which is gross annual value less municipal taxes) to arrive at the taxable income under the head income from house property. It has to be borne in mind that the deductions mentioned here (section 24) are exhaustive and no other deductions are allowed. The deductions admissible are as under: Statutory deduction:

30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred. Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. Amount of interest payable for the relevant year should be calculated and claimed as deduction. It is immaterial whether the interest has actually been paid during the year or not. However, there should be a clear link between the borrowal and the construction/purchase etc., of the property. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction. The following points are to be kept in mind while claiming deduction on account of interest on borrowed capital: 1. In case the property is let out, the entire amount of interest accrued during the year is deductible. The borrowals may be for construction/acquisition or repairs/renewals. 2. A fresh loan may be raised exclusively to repay the original loan taken for purchase/ construction etc., of the property. In such a case also, the interest on the fresh loan will be allowable. 3. Interest payable on interest will not be allowed. 4. Brokerage or commission paid to arrange a loan for house construction

will not be allowed. 5. When interest is payable outside India, no deduction will be allowed unless tax is deducted at source or someone in India is treated as agent of the non-resident.

COMPUTATION

OF

INCOME

FROM

SELF

OCCUPIED HOUSE PROPERTY

The annual value of one self-occupied house property, which has not been actually let out at any time during the previous year, is taken as Nil [Section 23(2) (a)]. From the annual value, only the interest on borrowed capital is allowed as a deduction under section 24. The amount of deduction will be: Either the actual amount accrued or Rs.30,000/- whichever is less When borrowal of money or acquisition of the property is after 31.3.1999 - deduction is Rs.1, 50,000/- applicable to A.Y 2002-03 and onwards. However, if the borrowal is for repairs, renewals or reconstruction, the deduction is restricted to Rs.30, 000. If the borrowal is for construction/acquisition, higher deduction as noted above is available.

If a person owns more than one house property, using all of them for self occupation, he is entitled to exercise an option in terms of which, the annual value of one house property as specified by him will be taken at Nil. The other self occupied house property/is will be deemed to be let out and their annual value will be determined on notional basis as if they had been let out.

HOW TO CALCULATE ANNUAL VALUE OF PROPERTY:

According to annual value, house property is calculated as Annual value of a house is zero if property is in the occupation of the owner for his residence for the whole year & if no other benefit is availed by owner from his property. There will be no deductions as given under section 24 except deduction interest on borrowed capital If the owner lets out the house or a part thereof for any period of time during the previous year the annual value of the property or part has to be calculated for the whole year and the proportionate annual value of the period for which the house or any part thereof was in the occupation of the owner for his own residence shall be deducted from the gross annual value. The assessee in such cases cannot claim deduction under section 24 in excess of the annual value so determined The assessee occupies more than one house for his residence, the above exemption is applicable only to one such house at the option of the assessee. The annual value of the other house or houses shall be computed as if the house or houses are let

 In case where the assessee has only one residential house but it cannot be occupied by the owner by reason of that owing to his employment, business or profession carried out on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house shall be taken to be nil if the house is not actually let and no other benefit is derived by the owner from such house. The assessee cannot claim any deduction in such case as allowable under section 24 of the Act except for interest on borrowed capital subject to a maximum of Rs. 15,000/-

COMPLETE

PROCESS

OF

COMPUTATION

OF

TAXABLE INCOME & TAX

1) Determine the residential status of the assesse 2) Determine the incidence of tax 3) Classify income after considering specific exemption into respective head. 4) Aggregate the income. 5) Apply clubing Provision. 6) Setoff/Carry forward losses (if any 7) Balance shall be gross total income.

8. Allow deduction 80C to 80U chpt VI A 9. Balance shall be total income. 10. Determine the tax payable, applying the rates applicable. 11. Deduct rebate/relief of tax. 12. Add surcharge. 13. Add educational cess. 14. Balance is tax payable. 15. File return of income before the due date of filing.